From the December/January 2013 issue of Futures Magazine • Subscribe!

Beating the Indexes: Investing in Convertible Bonds to Improve Performance and Reduce Risk

Book Review

In Part II, “Convertibles, a Better Solution,” Feingold makes the case for adding convertibles to one’s investing portfolio. The best reason, he says, comes from the crowding and herding that emanate from a market dominated by indexers and closet indexers. “…when you invest in convertibles, as long as you buy them properly, the selling largely takes care of itself.” 

Feingold offers a valuable lesson from his own experience as a convertibles trader. Early on he learned the value of an “01,” also known as a basis point or one hundredth of a percentage point. “To the bond trader this is everything.” He also became fascinated by options and their numerology, just as in his youth he was enthralled by baseball and its plethora of statistics. 

Feingold says there are three basic ways to make money in convertibles: Protected stock picking, prospering by surviving and arbitrage. “Beyond that you make money buying convertibles from motivated sellers.” 

Chapter 7 offers a series of reviews and quizzes to test the reader’s understanding of the concepts needed to make convertibles a part of an investment portfolio. Another section tracks the performance of biotech companies. Few companies have made better use of the convertible market than Human Genome Sciences (HGSI), notes Feingold. 

Chapter 9 examines what to look for in a convertible, saying a strategy of avoidance works best: Avoid companies with significant debt, financial companies with low equity market capitalization, airlines, companies with low equity market capitalizations relative to the size of the convertible and convertibles trading below 65¢on the dollar unless the market is in 2008-style chaos. 

Finally, Feingold wraps up his book with a glimpse into how people who trade convertibles every day think.

Patrick Kelly is a freelance writer with a background in commodity market reporting.

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